BF3201
Corporate Finance & Strategy
Answer Pop Quiz
Lecture 2
Risk and Return
Pop Quiz 1
 The tighter the probability distribution of its expected
future returns, the greater the risk of a given investment as
measured by its standard deviation
 True
False
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Pop Quiz 2
 The standard deviation is a better measure of risk than the
coefficient of variation if the expected returns of the
securities being compared differ significantly.
 True
False
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Pop Quiz 3
 Companies should deliberately increase their risk relative
to the market only if the actions that increase the risk also
increase the expected rate of return on the firm's assets to
completely compensate for the higher risk.
True
 False
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Pop Quiz 4
 If the expected rate of return on a stock exceeds the
required rate,
 a. The stock is experiencing supernormal growth.
 b. The stock should be sold.
 c. The company is probably not trying to maximize
price per share.
d. The stock is a good buy.
 e. Dividends are not being declared
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Pop Quiz 5
 When adding new securities to an existing portfolio, the
higher or more positive the degree of correlation between
the new securities and those already in the portfolio, the
greater the benefits of the additional portfolio
diversification
 True
False
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Pop Quiz 6
 According to the Capital Asset Pricing Model, investors
are primarily concerned with portfolio risk, not the risks of
individual stocks held in isolation. Thus, the relevant risk
of a stock is the stock's contribution to the riskiness of a
well-diversified portfolio.
True
 False
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Pop Quiz 7
 Which of the following statements is CORRECT?
 a. An investor can eliminate virtually all market risk if he or she
holds a very large and well diversified portfolio of stocks.
 b. The higher the correlation between the stocks in a portfolio,
the lower the risk inherent in the portfolio.
 c. It is impossible to have a situation where the market risk of a
single stock is less than that of a portfolio that includes the stock
 d. Once a portfolio has about 40 stocks, adding additional stocks
will not reduce its risk by even a small amount.
 e. An investor can eliminate virtually all diversifiable risk if
he or she holds a very large, well diversified portfolio of
stocks.
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Pop Quiz 8
 Stock X has a beta of 1.5 and Stock Y has a beta of 0.5. Which of the following
statements must be true about these securities? (Assume the market is in
equilibrium.)
 a. When held in isolation, Stock X has greater risk than Stock Y.
 b. Stock Y would be a more desirable addition to a portfolio than Stock X.
 c. Stock X would be a more desirable addition to a portfolio than Stock Y.
 d. The required return on Stock A will be greater than that on
Stock Y.
 e. The required return on Stock Y will be greater than that on Stock X.
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Pop Quiz 9
 Calculate the required rate of return for Mars Inc.’s stock.
Mars’s beta is 1.2, the rate on a T-bill is 4 percent, the rate
on a long-term T-bond is 6 percent, the required return on
the market is 11.5 percent, the market has averaged a 14
percent annual return over the last six years, and Mars has
averaged a 14.4 return over the last six years.
 ks = 6% + (11.5%-6%)1.2 = 12.6%.
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